Mumbai: After freeing loan rates, the Reserve Bank of India (RBI) is open to the idea of freeing the savings rate, the last bastion of administered rates. Although no time frame is fixed for this, governor D. Subbarao said in an interview that he wants a debate on the matter. Edited excerpts:

Steady approach: RBI governor D. Subbarao says a quantum jump in interest rate can hurt growth without helping on the inflation side. PTI

You are convinced that the economy is on a firm growth path and that inflation is rising. Then why this half-hearted action?

There will always be a counter-question. Whatever argument you take, why not something else? But I know where you are coming from. A lot of people have said we are behind the curve and that we should have been harsher. There are two models to do that—one is the Deng (Xiaoping) model of crossing the river by feeling each stone. I believe that as we unwind our expansionary policy, it is important to use the model of feeling the stone while crossing the river.

People who say we are behind the curve have their own growth-inflation dynamics. We have our own growth-inflation dynamics and that of liquidity management. And I believe that a calibrated move like this is better than a large quantum jump. We must also recognize that even as growth is consolidated, much of it is coming from sectors which are interest-rate sensitive. So a quantum jump in interest rate can hurt growth without necessarily helping on the inflation side.

The driving factor is management of the government borrowing programme. Given a choice, I am sure you would have been more aggressive in raising rates.

No, I think that interpretation will be incorrect. Yes, we happen to be the debt manager of the government. But if we were not the debt manager of the government and were just a monetary authority and there was somebody else managing the debt, even then I believe our monetary policy would take into account the borrowing programme and the yields movement in the (bond) market and what impact it would have on overall interest rates.

As the monetary authority, we are as much concerned about inflation as supporting growth. I don’t think our monetary stance would have been any different if we were not the debt manager.

As part of your calibrated approach, can we expect another round of rate hike before your next quarterly review?

I do not really want to speculate on that. We will take action, but mid-cycle action is something that we do not do lightly. We think a lot before taking action outside the cycle. It’s true that during the crisis we had taken a number of measures outside our scheduled policy reviews, but those were required at that time.

Why not monthly or six-weekly policy reviews?

Yes, we did consider that, and one of the strong reasons why we did not shift to a six-weekly review is lack of adequate data. There is a lot of build-up to RBI’s policy review and much of the build-up is held for the process of informing the market participants. Too much of it can be disruptive also. We don’t want to repeat that every six weeks. I know Bank of England does this more often and it could be a non-event. When we graduate or mature to a situation when RBI’s monetary policy issue can be a non-event, I think we can do reviews more frequently.

You have freed all administered loan rates but the savings rate is still regulated. Isn’t it high time that you took a look at it?

I think you are right and we should revisit... The issue had come up in the crisis time when we were lowering policy rates and the savings bank rate had acted as a floor. And now that we are freeing up (loan rates), there is a need to look at this. We do not have enough feel for its implications and ramifications. We have promoted financial inclusion and freeing up the interest rates on savings rate has big implications for financial inclusion. I have requested economists and I am requesting journalists to debate this issue and we will certainly benefit from that.

Is there any kind of time frame for freeing savings rate?

I am not looking at a time frame. But I would certainly be open to considering this issue.

So it’s not an academic exercise?

No, most certainly not.

You seem to be using the rupee appreciation as a tool to fight inflation. You are allowing the local currency to appreciate so that the cost of import goes down.

No, that’s not right. It is not the Reserve Bank’s policy. We don’t use exchange rate as an anti-inflationary management tool. We had a meeting of economists and opinions were divided across some of India’s most noted economists whether there is a pass through of exchange rate to inflation. The RBI has not done any specific study on this. A 2004-05 study said if the exchange rate depreciates by 10%, it will have an impact on inflation of up to 0.4%. It is not clear if those inferences are valued today. Our exchange rate is determined by a host of macroeconomic considerations and not as a means for managing inflation.

Apart from inflation, you are also worried about capital flows.

I wouldn’t say I am worried but the Reserve Bank as an institution is watching (capital flows) at the moment. The balance of payment numbers for the last quarter of 2009-10 are not available in the public domain and we have some numbers and we will come up with the precise numbers by the end of June. Last year, the flows were roughly commensurate with our current account deficit, slightly in excess, and I think we can absorb it. Something between the range of $10-15 billion is within our capacity.

There is lot of speculation on how the flows will turn out. It depends on the global situation, interest rates, liquidity. It depends on the promise of growth in India, promise of return and the interest rate differential.

When will you allow the next set of private banks to come up?

I am unable and unwilling to put a time frame on this. It will take several months because there are some significant issues that we have to consider. We gave the last licence in 2004 when Dr (Bimal) Jalan was the governor. Since then, India has changed a lot, the world has changed a lot, and the world view on banks have changed a lot. We will have to take account of all that.

What’s your take on the proposed supervisory body—the Financial Stability and Development Council? Do you see this as some sort of infringement on RBI’s domain?

The proposed council will do macro prudential supervision and monitor financial conglomerates. It would look after financial sector development, including financial literacy. I have gone through the finance minister’s speech at our platinum jubilee celebrations and he said very clearly there that the council is not to replicate anything that the existing structure is doing today.

I don’t see it as an infringement as the finance minister had said that it will operate in such a way that we it will not compromise our independence.

Anup Roy contributed to this interview.